The weather in the south of the UK has been unusually dry for the better part of two years now. In response, water companies in an around London are planning to introduce some modest restrictions on household water usage at the start of April.
Oddly enough, while this is going on, the insurance industry is worried about the exact opposite problem: flooding, and who gets to pick up the tab when it happens. Surprising precisely nobody, the insurance companies don't think it should be them, even though the terminally naive might think that's what householders pay their premiums for.
For a number of years now, insurers have agreed to continue providing cover to homeowners in flood-prone areas (we'll get back to those in a second) in return for assurances from the government that flood defences will be improved. That agreement is due to lapse next year, and insurance companies are warning that unless some other measure is put in place, as many as 200,000 homes across the UK will become uninsurable -- which in turn means they will become unmortgageable and unsellable.
There are certainly some parts of the UK that seem more liable to flooding than others: Sheffield and Shrewsbury, for example, seem for geographic reasons to be at a higher level of risk. However, we need to have some perspective: it's not the annual monsoon in Chittagong that we're talking about here. A few weeks ago there was a report on the TV that focused on a homeowner in Windsor who had been warned by his insurer that his cost of cover would soar if the companies' agreement with the government lapsed. The last time his riverside area was inundated was....1945! Sixty-plus years of collecting premiums without so much as a puddle to mop up, and the insurers still don't find the risks acceptable.
The only thing that most people know about the insurance industry is that it's lightning fast at collecting premiums but glacially slow to pay out. However, the business is a lot more complicated than that. Behind all the well-known names constantly flogging their wares on the television, there's a whole network of companies providing so-called "reinsurance". In the argot of the trade, insurers "cede" some of their premiums to a reinsurer, which in return takes on some of the risks. (Your friendly local bookie does something similar when he notices a large cumulative bet starting to build up). Behind the reinsurers there's another level of companies that take on the really catastrophic risks. Lloyds of London falls into this category, but the biggest such insurer in the world is none other than Berkshire Hathaway, Warren Buffett's little venture. Berkshire has done very nicely indeed out of the business, as you may have noticed.
Given the existence of this network of insurers' insurers, there's no obvious reason why the UK taxpayer is being asked (strong-armed might be a better word) to underwrite (subsidise might be a better word) this part of the business. The extent of flood risk in the UK is relatively trivial in the global scheme of things, and would be well within the capacity of the reinsurers and the catastrophic risk underwriters to handle. Of course, there actually is a very obvious reason: the insurance companies don't want to hand over a portion of their revenues in order to cover off the risk. Cheaper by far to try to dump it on the government.
As long as the drought continues, of course, this is going to remain an academic issue. Dry weather brings its own set of problems, however. As the clay soils of the southern UK dry out, subsidence risk -- the collapse of household foundations -- will increase. Homeowners who are affected by this can no doubt look forward to a stress-free experience when they pick up the phone to their insurer.
No comments:
Post a Comment